PSUs are not as efficient as private players in a competitive environment: Javad K. Shirazi

PSUs are not as efficient as private players in a competitive environment: Javad K. Shirazi

Associated with India for the past six years in the World Bank, four of which were spent in Washington D.C., Javad K. Shirazi has been in a unique position to examine India's economic reforms very closely. On the eve of relinquishing his post as director of the World Bank office in New Delhi, he spoke to Business Editor Sunil Jain, on the major challenges that have to be tackled for step-ping-up economic growth.

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SUNIL JAIN

July 15, 1996

ISSUE DATE: July 15, 1996

UPDATED: June 4, 2013 18:07 IST

Javad K. Shirazi

Associated with India for the past six years in the World Bank, four
of which were spent in Washington D.C., Javad K. Shirazi has been in a
unique position to examine India's economic reforms very closely. On the eve of relinquishing his post as director of the World Bank office in
New Delhi, he spoke to Business Editor Sunil Jain, on the major
challenges that have to be tackled for stepping-up economic growth.
While Shirazi is enthused by the rapid recovery from the crisis of
1990-91, he is categorical that unless serious efforts are made to
manage the fiscal deficit, economic growth is likely to get compromised. Excerpts:

Q. As you leave India, how do you see its economy?A. I leave with a sense of optimism that the Government, as well as the people, will be able to manage very effectively. I saw the macro-economic crisis of 1990-91 and it was remarkable how quickly India recovered. This recovery was not just in the forex reserves, the balance of payments or in economic growth there was a recovery in the confidence of businessmen and that is encouraging. It will be easier for the new Government to go on with reforms since it has inherited not just a stronger economy but also a more confident business class. It now has two positives to work with, and that always makes the task easier.

Q. But what about the problem of the fiscal deficit and the impact this is likely to have?A. No doubt, this is the most difficult macro-challenge the Government faces, and has many ramifications. It also means that the degree of freedom for the Government to spend on either priority social sectors or on areas like infrastructure is severely curtailed.

Q. Where will the $200 billion investment needed for infrastructure come from?A. I don't think the $ 200 billion figure is sacrosanct in itself, but obviously a lot will depend on the level of domestic savings as well as how much foreign savings the economy can absorb-and, of course, attract. To ensure that the foreign inflows are not inflationary, it is a truism that the level of current account deficit will have to be equal to the amount of inflows. If a ceiling is put on the size of the current account deficit 1.5 per cent of GDP is the figure being talked of currently that also puts a ceiling on how much can come from abroad. Under the circumstances, I think we're then talking of a maximum of $5-10 billion per year from all sources of foreign inflows.

Q. What are the options to increase revenue?A. The tax to GDP ratio can be increased by 2-3 per cent by streamlining the system and abolishing various tax exemptions like those given to corporates and others. The means by which tax revenues can be increased without increasing the rate of tax are well known to all fiscal experts. Increased cost recoveries from irrigation and electricity also offer huge scope to increase revenues. Clearly, a rupee lost in subsidies is a rupee less of investment, or a rupee less of government debt that could have been avoided or retired.

Q. Is the Government likely to raise user-charges, or cut expenditure?A. It is in most cases the rate of growth of expenditure that has to be managed carefully. Moreover, it is difficult to see how significant fiscal deficit reduction could succeed, in the medium-to-long term, without a major effort at better cost recoveries. It's also true that the Central Government cannot afford to bail out state governments or state electricity boards who are in a difficult financial position. Hence the need for greater revenues and more effective expenditure management at all levels.

Q. Isn't it possible for the Government to just make positive statements like the one on opening the insurance sector and attract private investments in infrastructure? Isn't it more important to attract investment than to cut expenditure?A. Private investment is indeed very important. However, if the fiscal deficit is not corrected, there will be more pressures on the financial market. After all, while the stock market is upbeat and foreign institutional investors (FIIs) are quite bullish and theoretically companies can raise a lot more money than they did last year, the fact is that interest rates still haven't gone down. Indeed, they are higher now than a year ago. They cannot go down if the deficit is not reduced and savings increased.

Q. Is it critical for the Government to disinvest? Isn't it enough to give the psus more autonomy and help build up the better ones?A. Apart from the fact that PSU disinvestment will be a big help in retiring the high government debt, I think it's clear that PSUs are not as efficient as private players in a competitive environment. So PSU disinvestment also means efficiency gains for the economy as a whole. I think reducing controls on PSUs, and removing the ones that tie them up, is a good thing, but it's certainly not a panacea. As far as attaining large-scale efficiency gains in PSUs are concerned, I've been hearing this for a very long time. The question is, if it could be done, why hasn't it been accomplished?

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